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CHAPTER 4
EVALUATING A COMPANY’S
RESOURCES, CAPABILITIES,
AND COMPETITIVENESS
1. Learn how to assess how well a company’s strategy is working.
2. Understand why a company’s resources and capabilities are
central to its strategic approach and how to evaluate their
potential for giving the company a competitive edge over rivals.
3. Discover how to assess the company’s strengths and
weaknesses in light of market opportunities and external
threats.
4. Grasp how a company’s value chain activities can affect the
company’s cost structure and customer value proposition.
5. Understand how a comprehensive evaluation of a company’s
competitive situation can assist managers in making critical
decisions about their next strategic moves.
4–2
EVALUATING A FIRM’S
INTERNAL SITUATION
1. How well is the firm’s present strategy working?
2. What are the firm’s competitively important resources and
capabilities?
3. Is the firm able to take advantage of market opportunities and
overcome external threats to its external well-being?
4. Are the firm’s prices and costs competitive with those of key
rivals, and does it have an appealing customer value
proposition?
5. Is the firm competitively stronger or weaker than key rivals?
6. What strategic issues and problems merit front-burner
managerial attention?
4–3
QUESTION 1: HOW WELL IS THE FIRM’S
PRESENT STRATEGY WORKING?

Best indicators of a well-conceived,
well-executed strategy:
●
The firm is achieving its stated financial and
strategic objectives.
●
The firm is an above-average industry performer.
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FIGURE 4.1 Identifying the Components of a Single-Business Company’s Strategy
4–5
SPECIFIC INDICATORS OF
STRATEGIC SUCCESS

Growth in firm’s sales and market share

Acquisition and retention of customers

Strengthening image and reputation with customers

Increasing profit margins, net profits and ROI

Growing financial strength and credit rating

Leadership in factors relevant to market\industry
success

Continuing improvement in key measures of operating
performance
4–6
STRATEGIC MANAGEMENT PRINCIPLE
♦ Sluggish financial performance and secondrate market accomplishments almost always
signal weak strategy, weak execution, or both.
4–7
TABLE 4.1
Key Financial
Ratios
4–8
TABLE 4.1
Key Financial
Ratios
4–9
TABLE 4.1
Key Financial
Ratios
4–10
TABLE 4.1
Key Financial
Ratios
4–11
QUESTION 2: WHAT ARE THE FIRM’S
COMPETITIVELY IMPORTANT
RESOURCES AND CAPABILITIES?

Competitive Assets
●
Are the firm’s resources and capabilities.
●
Are the determinants of its competitiveness and
ability to succeed in the marketplace.
●
Are what a firm’s strategy depends on to develop
sustainable competitive advantage over its rivals.
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CORE CONCEPTS
♦ A resource is a competitive asset that is owned
or controlled by a firm
♦ A capability or competence is the capacity of a
firm to perform and internal activity competently
through deployment of a firm’s resources.
♦ A firm’s resources and capabilities represent its
competitive assets and are big determinants of
its competitiveness and ability
to succeed in the marketplace.
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IDENTIFYING THE COMPANY’S
RESOURCES AND CAPABILITIES

A Resource
●

Is a productive input or competitive asset that is
owned or controlled by a firm (e.g., a fleet of oil
tankers).
A Capability
●
Is the capacity of a firm to perform some activity
proficiently (e.g., superior skills in marketing).
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STRATEGIC MANAGEMENT PRINCIPLE
♦ Resource and capability analysis is a powerful
tool for sizing up a company’s competitive
assets and determining if they can support a
sustainable competitive advantage over market
rivals.
4–15
TABLE 4.2
Types of Company Resources
Tangible Resources
Physical resources
Financial resources
Technological assets
Organizational resources
Intangible Resources
Human assets and intellectual capital
Brands, company image, and reputational assets
Relationships: alliances, joint ventures, or partnerships
Company culture and incentive system
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IDENTIFYING CAPABILITIES

An Organizational Capability
●
Is the intangible but observable capacity of a firm to
perform a critical activity proficiently using a related
combination (cross-functional bundle) of its
resources.
●
Is knowledge-based, residing in people and in a
firm’s intellectual capital or in its organizational
processes and functional systems, which embody
tacit knowledge.
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CORE CONCEPT
♦ A resource bundle is a linked and closely
integrated set of competitive assets centered
around one or more cross-functional
capabilities.
♦ The VRIN tests for sustainable competitive
advantage ask if a resource is Valuable, Rare,
Inimitable, and Non-substitutable.
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VRIN TESTING:
RESOURCES AND CAPABILITIES

Identifying the firm’s resources and capabilities
by testing the competitive power of its
resources and capabilities:
●
Is the resource (or capability) competitively Valuable?
●
Is the resource Rare—is it something rivals lack?
●
Is the resource hard to copy (Inimitable)?
●
Is the resource invulnerable to the threat of
substitution from different types of resources and
capabilities (Non-substitutable)?
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CORE CONCEPTS
♦ Social complexity (company culture,
interpersonal relationships among managers or
R&D teams, trust-based relations with customers
or suppliers) and causal ambiguity are two
factors that inhibit the ability of rivals to imitate a
firm’s most valuable resources and capabilities.
♦ Causal ambiguity makes it very hard to figure out
how a complex resource contributes to
competitive advantage and therefore
exactly what to imitate.
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STRATEGIC MANAGEMENT PRINCIPLE
♦ A company requires a dynamically evolving
portfolio of resources and capabilities to
sustain its competitiveness and help drive
improvements in its performance.
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CORE CONCEPT
♦ A dynamic capability is the ongoing capacity
of a firm to modify its existing resources and
capabilities or create new ones by:
●
●
Improving existing resources and capabilities
incrementally
Adding new resources and capabilities
to the firm’s competitive asset portfolio
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MANAGING RESOURCES AND
CAPABILITIES DYNAMICALLY


Threats to Resources and Capabilities:
●
Rivals providing better substitutes over time
●
Capabilities decaying from benign neglect
●
Disruptive competitive environment change
Managing Capabilities Dynamically
1. Attending to the ongoing modification
of existing competitive assets.
2. Taking advantage of any opportunities to
develop totally new kinds of capabilities.
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QUESTION 3: IS THE COMPANY ABLE
TO SEIZE MARKET OPPORTUNITIES
AND NULLIFY EXTERNAL THREATS?

SWOT Analysis
●
Is a powerful tool for sizing up a firm’s:

Internal strengths (the basis for strategy)

Internal weaknesses (deficient capabilities)

Market opportunities (strategic objectives)

External threats (strategic defenses)
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CORE CONCEPT
♦ SWOT analysis is a simple but powerful tool
for sizing up a company’s strengths and
weaknesses, its market opportunities, and
the external threats to its future well-being.
4–25
STRATEGIC MANAGEMENT PRINCIPLE
♦ Basing a company’s strategy on its most
competitively valuable strengths gives the
company its best chance for market success.
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IDENTIFYING A COMPANY’S
INTERNAL STRENGTHS

A Competence
●

A Core Competence
●

Is an activity that a firm has learned to perform with
proficiency—a capability.
Is a proficiently performed internal activity that is
central to a firm’s strategy and competitiveness.
A Distinctive Competence
●
Is a competitively valuable activity that a firm
performs better than its rivals.
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CORE CONCEPTS
♦ A competence is an activity that a firm has
learned to perform with proficiency—a
capability, in other words.
♦ A core competence is an activity that a firm
performs proficiently that is also central to its
strategy and competitive success.
♦ A distinctive competence is a competitively
important activity that a firm performs
better than its rivals—it thus represents
a competitively superior internal
strength.
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IDENTIFYING A FIRM’S WEAKNESSES
AND COMPETITIVE DEFICIENCIES

A Weakness (Competitive Deficiency)
●

Is something a firm lacks or does poorly (in
comparison to others) or a condition that puts it
at a competitive disadvantage in the marketplace.
Types of Weaknesses:
●
Inferior skills, expertise, or intellectual capital
●
Deficiencies in physical, organizational, or
intangible assets
●
Missing or competitively inferior capabilities
in key areas
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CORE CONCEPT
♦ A firm’s strengths represent its competitive
assets.
♦ A firm’s weaknesses are shortcomings that
constitute competitive liabilities.
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IDENTIFYING A COMPANY’S
MARKET OPPORTUNITIES

Characteristics of Market Opportunities:
●
An absolute “must pursue” market

●
A marginally interesting market

●
Represents much potential but is hidden
in “fog of the future.”
Presents high risk and questionable profit
potential.
An unsuitable\mismatched market

Is best avoided as the firm’s strengths are
not matched to market factors.
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STRATEGIC MANAGEMENT PRINCIPLE
♦ A company is well advised to pass on a
particular market opportunity unless it has or
can acquire the competencies needed to
capture it.
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IDENTIFYING THE THREATS TO A
FIRM’S FUTURE PROFITABILITY


Types of Threats:
●
Normal course-of-business threats
●
Sudden-death (survival) threats
Considering Threats:
●
Identify the threats to the firm’s future prospects.
●
Evaluate what strategic actions can be taken to
neutralize or lessen their impact.
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TABLE 4.3
What to Look for in Identifying a Firm’s Strengths,
Weaknesses, Opportunities, and Threats
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TABLE 4.3
What to Look for in Identifying a Firm’s Strengths,
Weaknesses, Opportunities, and Threats (cont’d)
4–35
STRATEGIC MANAGEMENT PRINCIPLE
♦ Simply making lists of a company’s strengths,
weaknesses, opportunities, and threats is not
enough; the payoff from SWOT analysis comes
from the conclusions about a company’s
situation and the implications for strategy
improvement that flow from the four lists.
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WHAT DO SWOT LISTINGS REVEAL?

SWOT Analysis Involves:
●
Drawing conclusions from the SWOT listings
about the firm’s overall situation.
●
Translating these conclusions into
strategic actions by the firm that:

Match its strategy to its internal strengths and
to market opportunities.

Correct important weaknesses and defend it
against external threats.
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FIGURE 4.2 The Steps Involved in SWOT Analysis: Identify the Four Components of
SWOT, Draw Conclusions, Translate Implications into Strategic Actions
4–38
USING SWOT ANALYSIS








What are the attractive aspects of the firm’s situation?
What aspects are of the most concern?
Are the firm’s internal strengths and competitive assets
sufficiently strong to enable it to compete successfully?
Are the firm’s weaknesses and competitive deficiencies
correctable, or could they be fatal if not remedied soon?
Do the firm’s strengths outweigh its weaknesses by an
attractive margin?
Does the firm have attractive market opportunities
that are well suited to its internal strengths?
Does the firm lack the competitive assets (internal strengths)
to pursue the most attractive opportunities?
Where on a scale of 1 to 10 (1 = weak and 10 = strong)
do the firm’s overall situation and future prospects rank?
4–39
QUESTION 4: ARE THE COMPANY’S COST
STRUCTURE AND CUSTOMER VALUE
PROPOSITION COMPETITIVE?

Signs of A Firm’s Competitive Strength:
●
Its prices and costs are in line with rivals.
●
Its customer-value proposition is competitive
and cost effective.
●
Its bundled capabilities are yielding
a sustainable competitive advantage.
4–40
STRATEGIC MANAGEMENT PRINCIPLE
♦ The higher a company’s costs are above those
of close rivals, the more competitively
vulnerable it becomes.
♦ Conversely, the greater the amount of
customer value that a company can offer
profitably relative to close rivals, the less
competitively vulnerable it becomes.
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THE CONCEPT OF A COMPANY
VALUE CHAIN

The Value Chain
●
Identifies the primary internal activities that create
and deliver customer value and the requisite related
support activities.
●
Permits a deep look at the firm’s cost structure and
ability to offer low prices.
●
Reveals the emphasis that a firm places on activities
that enhance differentiation and support higher prices.
4–42
CORE CONCEPT
♦ A company’s value chain identifies the primary
activities and related support activities that
create customer value.
4–43
FIGURE 4.3
A Representative Company Value Chain
4–44
COMPARING THE VALUE CHAINS
OF RIVAL FIRMS

Value Chain Analysis
●

Facilitates a comparison, activity-by-activity, of how
effectively and efficiently a firm delivers value to its
customers, relative to its competitors.
The Value Chain Analysis Process:
●
Segregate the firm’s operations into different types of
primary and secondary activities to identify the major
components of its internal cost structure.
●
Use activity-based costing to evaluate the activities.
●
Do the same for significant competitors.
4–45
STRATEGIC MANAGEMENT PRINCIPLE
♦ A company’s cost competitiveness depends
not only on the costs of internally performed
activities (its own value chain) but also on costs
in the value chains of its suppliers and
distribution channel allies.
4–46
VALUE CHAIN SYSTEM FOR
AN ENTIRE INDUSTRY


Industry Value Chain:
●
The firm’s internal value chain
●
The value chains of industry suppliers
●
The value chains of channel intermediaries
Effects of the Industry Value Chain:
●
Costs and margins of suppliers and channel partners
can affect prices to end consumers.
●
Activities of channel partners can affect industry sales
volumes and customer satisfaction.
4–47
FIGURE 4.4
A Representative Value Chain System
4–48
ILLUSTRATION CAPSULE 4.1
The Value Chain for KP MacLane,
a producer of Polo Shirts
4–49
ILLUSTRATION CAPSULE 4.1
The Value Chain for KP MacLane,
a producer of Polo Shirts
♦ Which activities in the value chain are primary
activities? Which are secondary activities?
♦ Which activities are linked to the value chain
for the entire industry?
♦ How could activity cost(s) could be reduced
without harming the competitive strength of
KP MacLane?
4–50
STRATEGIC MANAGEMENT PRINCIPLE
♦ A company’s cost competitiveness depends
not only on the costs of internally performed
activities (its own value chain) but also on costs
in the value chains of its suppliers and
distribution channel allies.
4–51
CORE CONCEPT
♦ Benchmarking is a potent tool for improving a
company’s own internal activities that is based
on learning how other companies perform them
and borrowing their “best practices.”
4–52
BENCHMARKING AND
VALUE CHAIN ACTIVITIES


Benchmarking:
●
Involves improving a firm’s internal activities based
on learning other companies’ “best practices.”
●
Assesses whether the cost competitiveness and
effectiveness of a firm’s value chain activities are
in line with its competitors’ activities.
Sources of Benchmarking Information
●
Reports, trade groups, analysts and customers
●
Visits to benchmark companies
●
Data from consulting firms
4–53
STRATEGIC MANAGEMENT PRINCIPLE
♦ Benchmarking the costs of company activities
against rivals provides hard evidence of
whether a company is cost-competitive.
4–54
ILLUSTRATION CAPSULE 4.2
Benchmarking and Ethical Conduct
• Avoid discussions or actions that could lead to or
imply an interest in restraint of trade, market
and/or customer allocation schemes, price fixing,
dealing arrangements, bid rigging, or bribery.
Don’t discuss costs with competitors if costs are
an element of pricing.
• Be honest and complete with the information
submitted.
• Refrain from the acquisition of trade secrets from
another by any means that could be interpreted
as improper, including the breach of any duty to
maintain secrecy. Do not disclose or use any
trade secret that may have been obtained through
improper means or that was disclosed by another
in violation of duty to maintain its secrecy or limit
its use.
• Honor the wishes of benchmarking partners
regarding how the information that is provided will
be handled and used.
• Be willing to provide to your benchmarking
partner the same type and level of information
that you request from that partner.
• Communicate fully and early in the relationship to
clarify expectations, avoid misunderstanding, and
establish mutual interest in the benchmarking
exchange.
• The use or communication of a benchmarking
partner’s name with the data obtained or practices
observed requires the prior permission of the
benchmarking partner.
• In benchmarking with competitors, establish
specific ground rules up-front. For example, “We
don’t want to talk about things that will give either
of us a competitive advantage, but rather we want
to see where we both can mutually improve or gain
benefit.”
• Check with legal counsel if any informationgathering procedure is in doubt. If uncomfortable,
do not proceed. Alternatively, negotiate and sign a
specific nondisclosure agreement that will satisfy
the attorneys representing each partner.
4–55
STRATEGIC OPTIONS FOR REMEDYING
A COST OR VALUE DISADVANTAGE

Places in the total value chain system for a firm
to look for ways to improve its efficiency and
effectiveness:
1. The firm’s own internal activity segments
2. The suppliers’ part of the overall value chain system
3. The forward channel portion of the value chain
system.
4–56
IMPROVING INTERNALLY PERFORMED
VALUE CHAIN ACTIVITIES

Implement best practices throughout the firm, particularly for highcost activities.

Eliminate some cost-producing activities altogether by revamping
the value chain.

Relocate high-cost activities to areas where they can be performed
more cheaply.

Outsource activities that can be performed by vendors or
contractors more cheaply than if done in-house.

Invest in productivity enhancing, cost-saving technological
improvements.

Find ways to detour around activities or items where costs are high.

Redesign products and/or components to facilitate speedier and
more economical manufacture or assembly.
4–57
IMPROVING THE EFFECTIVENESS OF THE
CUSTOMER VALUE PROPOSITION AND
ENHANCING DIFFERENTIATION

Implement best practices for quality for high-value activities.

Adopt best practices and technologies that spur innovation,
improve design, and enhance creativity.

Implement the best practices in providing customer service.

Reallocate resources to activities having the most impact on value
for the customer and their most important purchase criteria.

For intermediate buyers, gain an understanding of how the
activities the firm performs impact the buyer’s value chain.

Adopt best practices for marketing, brand management, and
enhancing customer perceptions.
4–58
IMPROVING SUPPLIER-RELATED
VALUE CHAIN ACTIVITIES

Pressure suppliers for lower prices.

Switch to lower-priced substitute inputs.

Collaborate closely with suppliers to identify mutual cost-saving
opportunities.

Work with suppliers to enhance the firm’s differentiation.

Select and retain suppliers who meet higher-quality standards.

Coordinate with suppliers to enhance design or other features
desired by customers.

Provide incentives to suppliers to meet higher-quality standards,
and assist suppliers in their efforts to improve.
4–59
IMPROVING VALUE CHAIN ACTIVITIES
OF FORWARD CHANNEL ALLIES

Achieving Cost-Based Competitiveness:
●
Pressure forward channel allies to reduce their costs
and markups so as to make the final price to buyers
more competitive.
●
Collaborate with forward channel allies to identify
win-win opportunities to reduce costs.
●
Change to a more economical distribution strategy,
including switching to cheaper distribution channels.
4–60
ENHANCING DIFFERENTIATION THROUGH
ACTIVITIES AT THE FORWARD END OF THE
VALUE CHAIN SYSTEM

Enhancing Differentiation:
●
Engage in cooperative advertising and
promotions with forward channel allies.
●
Use exclusive arrangements with downstream
sellers or other mechanisms that increase their
incentives to enhance delivered customer value.
●
Create and enforce standards for downstream
activities and assist in training channel partners
in business practices.
4–61
STRATEGIC MANAGEMENT PRINCIPLE
♦ Performing value chain activities with
capabilities that permit the company to either
outmatch rivals on differentiation or beat them
on costs will give the company a competitive
advantage.
4–62
FIGURE 4.5
Translating Company Performance of Value Chain
Activities into Competitive Advantage
4–63
FIGURE 4.5
Translating Company Performance of Value Chain
Activities into Competitive Advantage (cont’d)
4–64
QUESTION 5: IS THE FIRM
COMPETITIVELY STRONGER OR
WEAKER THAN KEY RIVALS?

Assessing the firm’s overall competitive
strength:
●
How does the firm rank relative to competitors
on each of the important factors that determine
market success?
●
Does the firm have a net competitive advantage
or disadvantage versus major competitors?
4–65
STRATEGIC MANAGEMENT PRINCIPLE
♦ High-weighted competitive strength ratings
signal a strong competitive position and
possession of competitive advantage; low
ratings signal a weak position and competitive
disadvantage.
4–66
THE COMPETITIVE STRENGTH
ASSESSMENT PROCESS
Step 1
Make a list of the industry’s key success factors
and measures of competitive strength or
weakness (6 to 10 measures usually suffice).
Step 2
Assign a weight to each competitive strength
measure based on its perceived importance.
Step 3
Rate the firm and its rivals on each competitive
strength measure and multiply by each measure
by its corresponding weight.
4–67
TABLE 4.4
A Representative Weighted Competitive Strength Assessment
4–68
STRATEGIC MANAGEMENT PRINCIPLE
♦ A company’s competitive strength scores
pinpoint its strengths and weaknesses against
rivals and point directly to the kinds of
offensive/defensive actions it can use to exploit
its competitive strengths and reduce its
competitive vulnerabilities.
4–69
STRATEGIC IMPLICATIONS OF
COMPETITIVE STRENGTH ASSESSMENT

The higher a firm’s overall weighted strength rating, the
stronger its overall competitiveness versus rivals.

The rating score indicates the total net competitive
advantage for a firm relative to other firms.

Firms with high competitive strength scores are targets
for benchmarking.

The ratings show how a firm compares against rivals,
factor by factor (or capability by capability).

Strength scores can be useful in deciding what strategic
moves to make.
4–70
STRATEGIC MANAGEMENT PRINCIPLE
♦ A good strategy must contain ways to deal with
all the strategic issues and obstacles that stand
in the way of the company’s financial and
competitive success in the years ahead.
4–71
QUESTION 6: WHAT STRATEGIC ISSUES
AND PROBLEMS MERIT FRONTBURNER MANAGERIAL ATTENTION?

Strategic “How To” Issues:
●
How to meet challenges of new foreign competitors.
●
How to combat the price discounting of rivals.
●
How to both reduce high costs and prepare for price
reductions.
●
How to sustain growth as buyer demand slows.
●
How to adapt to the changing demographics of the
firm’s customer base.
4–72
QUESTION 6: WHAT STRATEGIC ISSUES
AND PROBLEMS MERIT FRONTBURNER MANAGERIAL ATTENTION?

Strategic “Should We” Issues:
●
Expand rapidly or cautiously into foreign markets.
●
Reposition the firm to move to a different strategic
group.
●
Counter increasing buyer interest in substitute
products.
●
Expand of the firm’s product line.
●
Correct the firm’s competitive deficiencies by
acquiring a rival firm with the missing strengths.
4–73
STRATEGIC MANAGEMENT PRINCIPLE
♦ Zeroing in on the strategic issues a company
faces and compiling a list of problems and
roadblocks creates a strategic agenda of
problems that merit prompt managerial
attention.
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